GSIS reinsurance monopoly: World’s top brokers linked to overprice

Philippine Center for Investigative Journalism (Fourth of a series)

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Click here to read Part II
Click here to read Part III

Former Jardines senior vice president for reinsurance Celestino Anacion, who knew about the negotiations in London, said this claim was a result of the damage to the National Power Corp.’s various facilities by typhoon Loleng. The loss amounted to a substantial $6.5 million.

Anacion said it was already in "the middle of the policy period when the London underwriters discovered the huge discrepancy in the reporting of Napocor’s losses." The exclusion of the $6.5-million claim "made the underwriters mad" as they felt short-changed in the contract.

After the incident, the underwriters threatened to cancel the contract for 1999 as this was tantamount to breach of trust, Anacion said.

Those who negotiated with the London underwriters were representatives of Jardines Lloyd Thompson Asia, Jardines’ Singapore unit, GSIS president Federico Pascual, Napocor president Federico Puno, vice president for finance Merle Pajarillo, and risk manager Antonio Ingco.

As a compromise, the London underwriters were offered an extended 18-month cover in 2000 for them to be able to recoup their losses from the earlier policy, Anacion said. But the underwriters rejected this and demanded 36 months.

Held hostage by the London underwriters, he said, Napocor ended up with an extended insurance cover good for three years instead of the original one year. The premiums were set at $27 million but since the policy is subject to renewal after 18 months, Anacion said, Napocor was billed for $13.5 million.

Jardines, which was able to keep its contract for three years straight after the renewal, said the extended insurance cover was "an attempt to save NPC future premiums due to the hardening market" that would have otherwise made the premiums pricey.

The contract was also extended "in anticipation of NPC’s privatization which at the time was anticipated to take place 18 months from renewal date."

In an interview, Cortez said Napocor president Puno suggested an 18-month cover because the state agency’s privatization was expected to take place in 18 months. But sources who saw the documents on last year’s negotiations say Puno didn’t even mention the possibility of privatization when he presented the contract to the Napocor board.

In fact, when the contract was being negotiated in London, the Napocor privatization law was stuck in Congress and approved only in April this year.

Before the London trip, Ingco, Napocor risk management head, prepared the power firm’s inventory of losses, which would be the basis for computing premiums and commissions. A GSIS official who saw the tender documents said Ingco placed Napocor’s property damage at $20 million, more than double the $9 million the GSIS had estimated.

Ingco was one of the Napocor officials who, Alcordo said, were caught "holding secret meetings with GSIS people." Alcordo has asked for their transfer, although they denied any connivance with the GSIS. These officials are now under investigation, following internal procedures, before a case against them is filed.

"Underwriters in London will necessarily increase the premium with the kind of loss experience portrayed by Napocor through its Risk Management Manager," said a GSIS official.

Thus, from a net premium (excluding commissions) of $5.4 million in Napocor’s 1999-2000 policy, GSIS set a $9-million net premium in the tender for the 2000-2001 policy.

The deductibles–part of the insurance claim that will be borne by Napocor–were also adjusted to $500,000 for all types of losses and $1.5 million for a separate cover on submarine cables. The previous deductibles were only $150,000 and $300,000, respectively.

Despite the inflated adjustments, the GSIS received proposals lower than Jardines’. One foreign broker — Lambert Fenchurch — offered a net premium of $6.2 million for the placement. Still, the GSIS accepted Jardines’ offer of $13.5 million, more than double that of Lambert Fenchurch.

Jardines broke down the $13.5-million net premium as follows: five percent retained by GSIS amounted to $675,000; while the 95 percent reinsured through Jardines and Marsh totaled $12.8 million. Of the reinsured premiums, Jardines placed 60 percent in London while Marsh handled 35 percent.

Alcordo believes the policy has been "seriously overpriced" by $8 million. Excluding commissions, he said the reinsurance for the 18-month contract should have only cost Napocor $4.9 million.

Jardines, on the other hand, said $4.9 million only represents the premiums ceded to London underwriters who would bear the risk in excess of what the first-layer reinsurers would be willing to take, amounting to $7.5 million.

"It was a simple mistake. We don’t know why they can’t see that computation," said Jardines chief executive officer Kevin Norman.

When Napocor asked Jardines for documentation on the placement of the "excess of loss" of $4.93 million, however, the broker could only account for the first layer handled by German firms Allianz, Munich Re, and a group of Lloyds syndicates.

In an Oct. 17, 2001 letter to GSIS executive vice president Robert Malonzo, Jardines’ Cortez admitted details on the placements ceded by the primary reinsurers "are not within the knowledge" of the broker.

On the other hand, Marsh & McLennan disclosed details on where it placed its 35-percent share of the risk, down to the excess of loss layer which involved three companies handling $79,875 worth of premiums.

Fat commissions

Jardines’ letter to Malonzo also disclosed that the two brokers received a 25-percent commission for their placements. This, it said, is "allocated partly to survey fees and partly as reinsurance brokerage" paid out to Jardines’ and Marsh’s offices in London, Singapore and Manila.

The commission, it said, came from reinsurers "out of the premiums paid to them by the ceding company."

In its April 12, 2000 billing statement, however, Jardines charged the GSIS a "broker’s fee" of $135,000, despite its claim that the commission and other fees were already included in the premiums paid by Napocor.

Marsh, meanwhile, claimed it received "less than 25-percent commission" taken from the gross premiums.

Industry insiders say 25 percent for brokers is "on the high side;" usually, commissions range from 2.5 percent to 10 percent. They said it is also unusual for brokers to charge fees as this is already tantamount to "double-dipping."

So even as it only passed on the risk, Jardines ended up pocketing $3.3 million in fees and commissions–triple that of the GSIS which absorbed five percent of the risk and got only $1 million in reinsurance commission and premiums.

On top of the fat commissions paid to the brokers, the GSIS also charged Napocor a 10-percent expanded value-added tax of $1.3 million.

Both the GSIS and Napocor are tax-exempt. Reinsurance contracts are also exempt from taxes, says the Bureau of Internal Revenue (BIR), as the insurance premium has already been subjected to EVAT. Reinsurance is simply an insurance of an insurance.

Vida Chiong, deputy commissioner of the Insurance Commission (IC) agrees, adding that reinsurers are foreign institutions that carried out transactions offshore, therefore exempt from paying taxes here.

The tax, fees and commissions jacked up the cost of Napocor’s policy by 12 percent, with GSIS charging $15.2 million.

GSIS president and general manager Winston Garcia said it remits the EVAT payments to the BIR. A check with the IC, however, revealed the GSIS does not declare the taxes it collected or paid because it is a tax-exempt institution.

Napocor, however, is not the only government agency that was taxed by the GSIS. Where all the money went is still a mystery which the Department of Finance is now investigating.

Profile of a favored broker

For years, Jardine Lloyd Thompson Insurance Brokers Inc., the fifth-biggest broker in the world, cornered some of the biggest insurance deals in the Philippines.

There is a simple reason for this: its biggest client is the Government Service Insurance System (GSIS), which is mandated by law to secure some P1.5 trillion worth of state assets.

In the 20 years that it has been operating in the country as a company owned by British firm Jardine Davies Inc., Jardines has not been questioned publicly about its dealings. But since September, when National Power Corp. (Napocor) president Jesus Alcordo blew the whistle on the "overpriced" insurance contract that GSIS sold to the power company, Jardines has been openly described by Napocor officials as a "favored broker" of GSIS.

In the insurance industry, Jardines’ close relationship with GSIS has been an "open secret" for many years, says one long-time insurance agent. In huge deals involving GSIS, Jardines’ name always surfaced, insurance brokers say.

Until recently, Jardines was the top reinsurance broker in the country. Last year, it was overtaken by the little-known Orient Pearl Insurance and Reinsurance Brokers, Inc., which started operating only in 1999.

Documents, interviews, as well as interlocking relationships indicate that Orient Pearl is actually a front for Jardines. The company was apparently formed so that Jardines could steer clear of the controversies that were bound to be generated by its dealings with the government.

A company insider added that Jardines’ London headquarters frowned upon the way the Napocor account had been handled and didn’t want the British firm’s name dragged into the fray. (To be continued)